Sunday, January 22, 2017

An ongoing question I've talked about a few times before is that at least some of our toughest social problems are really technology problems. That is, not problems of a lack of technology, but of a surfeit of neutral or even beneficial technology which is having unexpected negative side effects. Mass illegal immigration is mostly a problem of cheap transport, for instance.

I mostly think about the declining birthrates in much the same way as I think about the increase in obesity (which deserves its own post for sure). Specifically, that technology has produced an environment so unlike that to which we’re evolutionarily adapted that people’s instincts no longer produce reliably good outcomes.

In other words, reliable contraception and abortion has been like a basilisk. It short circuits what had previously been a very successful evolutionary adaption which used to have high reproductive fitness. It leaves humans like the moth circling the light bulb, thinking it is the moon and flying in circles until it drops of exhaustion.

What are the instincts that people have with respect to children and reproduction?

1. People have a very strong, uncomplicated and concrete desire to have sex, ideally right now. They don't need marketing campaigns to make them want to do this. Oddities like Japan aside, people seem to have no problem getting laid.

2. People have a somewhat strong, but quite complicated, abstract and malleable, desire to have children, at some point in time.

3. People have a very strong, uncomplicated desire to love and care for the children they have.

#2 and #3 are deliberately split into two parts. As the great Gary Becker put it, you don't love your children as much as you learn to love your children once they arrive. There was usually the option to have one more child, which you chose not to do, often as part of a quite sensible cost/benefit tradeoff. Of course, if people had an unplanned pregnancy and had another child anyway, they'd still love and care for the child. But the fact that each child gets loved intensely once it arrives doesn't cause people to want as many children as possible. The love only kicks in after they arrive, and the prospect of loving another child in the abstract does not exert nearly the same overwhelming pull.

In other words, traditional reproduction worked primarily through #1 and #3. A strong desire to have sex ensures children are produced with fairly high regularity, because birth control is either non-existent or unreliable. A strong desire to care for children once they arrive ensures they live to adulthood if resources allow. #2 served mostly as a general background reinforcement. This is the environment we all lived in from 10 million BC until the 1950's or so.

The whole idea of it being a contentious question whether you chose to have kids or not is, as far as I can tell, a shockingly recent question. If the only way you could so choose would be to either a) not get laid, or b) rely on methods that require practice, discipline in the heat of coital moment, forward planning and/or health risks, the discussion would be largely moot.

With birth control, childbirth has been largely disconnected from being a necessary consequence of getting laid. It seems that most unplanned pregnancies are teenagers who are still learning the ropes of birth control, the very poor who simply can't afford it, or people with very low forward planning skills. But regardless of how you cut it, in the modern era it is very easy to take precautions that mean you can have sex for an extended period and not get pregnant.

As a result, we’re now expecting the second, weaker desire to do the job where previously the heavy lifting was done by the first. You have to choose to have children. Is it a wonder that this doesn’t wholly succeed?

This doesn't mean that the problem is impossible - social pressure can be a powerful force, if the right motivations and incentives are set up. But make no mistake, we're expecting new social engineering to reproduce a result that was previously done just by our evolutionary adaptions.

I suspect that we are only recently finding out that the majority of human survival and reproduction was actually driven by unplanned or unwanted pregnancies. We now suffer from a want of unwanted pregnancies, and we don't know how to make up the difference.

Wednesday, January 11, 2017

Of all the ideas in Unqualified Reservations, perhaps the one I found most compelling is the comparison of the state with a corporation.

In the Moldbug view, the state, in any meaningful sense, already is a corporation - a group of individuals working for a shared purpose under an agreed-upon structure. It's just that the modern democratic state is a very oddly run corporation. This was satirised very well in the Moldbug theory of rotary management, where he described how bewildering democratic governance would look if applied to a regular company.

But behind the parody was a serious, and brilliant, point. Most educated people in the west think that the way we run corporations is approximately optimal, given their tasks. That is, being run with dispersed shareholders separate from the customer base, elections of board members who appoint an all-powerful CEO who is subject to board dismissal, and a share price to monitor performance. And most educated people in the west similarly think that the way we run governments is approximately optimal, given their tasks - that is, with democratic elections, a permanent civil service, judicial review etc.

But it is not at all clear that the tasks of the two organisations are that different. And since they are governed in such totally different ways, if you think that they are both optimal, it is incumbent upon you to explain what specifically about the differences between the organisational tasks requires such totally different structures.

The Moldbug answer is quite simple - there is no difference. Companies fill essentially similar functions to countries, and we can thus judge the expected success of difference governing structures by the relative success of different company structures. Sovereign corporations would likely outcompete sovereign democracies, in much the same way that regular corporations outcompete co-operatives (which is approximately what democracies are, but with more dysfunction). They just haven't been tried.

But there is another aspect to this metaphor that gets less emphasis.

Suppose we have a family-owned firm. All the shares are owned in their entirety by the male head of the family, the father. The father is both the sole shareholder and the CEO. He passes both the CEO position and his equity stake, simultaneously, to his eldest son upon his death. In this corporation, the two roles are inextricably linked by company by-laws - if at any point the father ceases his role as CEO and transfers it to someone else, then the shares and any cash flow rights are transferred to his successor, except those periodic payments given as a gratuity by the new CEO who may keep him on as an informal adviser. This has some beneficial effects, since the principal-agent problem is basically solved - the CEO now has the strongest possible incentives to maximise the value of his shares.

The father does not have to make every single decision - as CEO, he can hire advisers and delegate certain decisions, but ultimate authority must remain with him in order for him to retain his ability to reap the profits of the company. As both CEO and sole shareholder, there is no board to either evaluate his performance as CEO, or provide external opinions - the only opinions he will hear are those of subordinates directly employed by him, and who may be fired by him at any moment. Indeed, as CEO he is wary of delegating too much, lest people misinterpret these actions under the company by-laws as meaning that his delegate is actually the new CEO and shareholder. As a result, it is hard for him to reap the profits of the company without actively managing it. At first this works okay, but he has to keep doing this even when he is old and feeble - retirement means losing his equity stake.

Because the CEO must hold all the shares, he is prevented from raising outside equity. If he wants to raise capital for a project, only debt financing is available. As a result, if the CEO has a firm that is short in pledgeable assets, he may find it difficult to raise external funds for capital projects. This occasionally makes it difficult for him to ward off competitor firms.

While the father naturally has affection for his son and successor, he loves his other children too, and ideally would like to arrange to transfer his shares to a formal trust to provide for all of them. Unfortunately, company by-laws prevent the shares from being transferred to a trust. Most of the time, he can rely on his oldest son to treat the rest of the family fairly well, but it's always a gamble. In addition, he occasionally suspects that the total profits would be greater if he transferred power to his smarter, younger son, rather than his oldest wastrel son. But the by-laws are fairly strict on that point.

Every so often in the corporate history, the father becomes completely evil, incompetent, or mad. Since this threatens not only the value of his shares, but the livelihoods of his senior employees and the welfare of the customers, they occasionally take drastic action. But since the by-laws don't allow for the removal of a bad CEO, and since there's no way for the CEO to transfer control without impoverishing himself, this usually means that the current CEO has to be killed. Since this is a risky move, which the current CEO has the highest conceivable incentives to prevent, it's only attempted in the most dire circumstances.

There are other unscheduled transfers of power. Sometimes, the eldest son gets impatient, and kills off the father. Sometimes, a junior son will kill off the eldest in a deniable manner, in order to be further in line for the CEO job. You'd think that the by-laws would explicitly preclude someone from benefiting in this manner, and the shares and CEO job would be taken away, but oddly this isn't the case.

Because the parallels are more straightforward, and because I lack the cleverness and imagination of Moldbug, it's probably quite apparent that I'm describing a simplified version of absolute monarchy. I have defended absolute monarchy before, and think that it probably worked a lot better than people today tend to think. But like before with democracy, we can use the history of corporate governance to judge the merits of monarchy versus neocameralism, or sovereign corporations.

Reader, suppose that we unleashed our monarchical corporation into the world, to compete with the firms in the S&P 500. Do you suppose it would succeed? True, it has its advantages. If it started in office with a great CEO, it might do quite well for a while, since it wouldn't suffer from the standard principal agent problems of managers empire-building, or enriching themselves at the expense of shareholders. But how long do you think such an arrangement would last, especially past the first CEO? Most CEOs, even good ones, are only at the top of their game for a short number of years, and when they screw up, they have to get replaced by someone else, who is picked from among the top managers across the whole planet. The advantages here are fairly plain.

It seems quite apparent that our monarchical firm would struggle to compete. Most of the world's successful coprorations have structures that are nothing like the one we describe above. They look more like our regular, familiar public firms.

"But," you may protest, "there are successful family firms too!"

This is true. In the world today, there are large, successful family-run firms. But they tend look more like regular public companies than our monarchical corporation. Many of them are publicly traded as well, like Wal-Mart, with the family retaining only a controlling stake. Out of the rest, the shares can be distributed across family members or held a trust. The CEO job can be kept within the family, or transferred to an outsider (even if the outsider is "adopted" into the family, like in Japan). The firm can raise equity financing.

And for the families that own such firms, they don't seem to be in a huge hurry to change their corporate by-laws to those of a monarchical corporation. By revealed preference, they seem to prefer more modern arrangements.

Out of the various aspects of an absolute king, it seems beneficial that the executive has absolute authority over personnel, budget, operations, and other kinds of organisational decisions. Divided power in this regard mostly just causes problems and inefficiencies. But the linking of absolute organisational authority (which both the King and CEO share) with sole inalienable equity ownership (which only the King has) is not nearly so obviously beneficial. And the process of removing a bad CEO seems far preferable to the process of removing a bad king.

Moreover, if the CEO is not to be the sole shareholder, then it seems misguided to make the CEO the sole judge of his own performance. Having a board, who lacks any major organisational authority except the power to appoint and remove the CEO, along with other major structural changes, seems fairly benign as far as divided power goes, and is very beneficial in the event that you need to change the CEO. It's possible that the board might become meddlesome, but most of the charges against boards made by economists are that they rubber stamp the CEO's decisions too much, not that they're overly combative.

And finally, dispersed shareholders also go a decent way to combating the problem of an owner with perverse or evil preferences. When the sole shareholder in a country is the king, it's possible that the king just has preferences for evil, nasty stuff. Sure, he'd like more profit, but perhaps he's more interested in droit du seigneur, even though it's value-destroying and the citizens hate it.

But if we take the preferences of a multitude of shareholders, and ask what set of preferences can they agree upon, it's typically to just get paid more. In other words, maximise dividends, and let each shareholder buy whatever he wants. There's not usually cross-subsidisation of shareholders in their purchases from the company. It's possible that shareholder citizens in a sovereign corporation might also vote for droit du seigneur, but it seems easier and cheaper to just get hookers or groupies with the extra dividends.

Sovereign corporations have their problems, no doubt. But if your plan for how you'd like a government to be run varies wildly from how you'd like a regular corporation to be run, then you at least want to know the specific reasons why, lest the ghost of William of Occam haunts your country's fortunes.